Investment market review - Quarter-ended 30 June 2018
The Research Team provides a performance summary and commentary on each of the five main asset classes.
The S&P/ASX 300 Accumulation Index outperformed most global markets in the June quarter.
The index was up 8.4% driven by strength in energy and health care stocks. The increase in energy shares was a by-product of continued strength in oil prices that translates into higher profits. Health care strength was led by an earnings upgrade from CSL as well as the exposure of much of this sector to overseas markets which means the depreciation of the Australian dollar increases earnings. The depreciation of the Australian dollar means that by translating foreign currency back into AUD these companies benefit from extra profits because each foreign dollar of profits is worth more. On a sector level, the best performers were Energy (up 19.7%), Healthcare (up 16.5%) and consumer staples (up 11.9%). Telecommunications was the worst performing (and only negative) sector, as Telstra dragged the sector down by 13.7% overall.
Listed property trusts
The Australian real estate investment trust (A-REIT) sector generated a strong return of 9.8% for the June quarter with the stalling of bond yields providing a tailwind for the sector.
A-REITs are viewed as a proxy for bonds, which means falling bond yields, in this case because of trade war concerns, can result in poor performance for this asset class. However, valuations heading into the June quarter were pushed to extremes with the sector being re-rated as investor sentiment turned to the attractive yields on offer. Also, some rebalancing amongst investors following the exit of index heavyweight Westfield following its acquisition by European property giant Unibail-Rodamco boosted the sector.
Movements in bond yields deserve watching for the ongoing prospects of this sector.
International share markets had a strong quarter with the MSCI World Index, in Australian dollar terms, recording a gain of 5.8% for the June quarter.
The strength can be attributed to improving corporate earnings, economic fundamentals and forward-looking indicators, such as purchasing manager indices. Specifically, the synchronicity of these factors has faded in recent months, led by weakness in China and Europe while the US goes from strength to strength. Given that US shares still dominate international indices, their ongoing strength helped the international index finish the quarter higher. That strength was driven by the ongoing leadership of major US tech companies. Apple, for example, almost reached a $1 trillion market value as a result of strong iPhone sales. Chinese shares, by contrast, look to be entering another bear market as they are weighed down by a combination of US trade war concerns and tightening credit conditions with the People’s Bank of China looking to rein in excessive leverage within the Chinese economy.
The Australian three-year bond yield was 1 basis points (bps) higher at 2.06% and the ten-year rose by 3bps to 2.63%.
The US yield curve rose with the three-year bond yield increasing 24bps to 2.62% and the ten-year by 12bps to 2.86%. Yields rose initially in the quarter, driven by strong US economic data and a surge in commodity prices that stoked inflation concerns. These factors were swamped, however, by a bleaker view on global growth as a result of trade concerns as the tensions between the US and China escalated and spilled over to affect other nations including the EU, Canada and Mexico. This added to investor appetite for safe-haven assets, keeping bond yields lower over the quarter with the US 10-year briefly moving above the 3% level before retreating. However, US yields still finished the quarter higher overall. In addition, the latest forecasts by the Federal Reserve pointed to an acceleration in the pace of interest rate increases and now there is a further increase predicted for later this year.
The RBA left the cash rate unchanged at a historical low of 1.50% in the June quarter.
The RBA maintained their concern over low wage growth and high levels of household debt. While leading indicators should see wage growth rise consequently lifting inflation, the RBA’s emphasis is on a gradual increase in rates. Rising job vacancies (indicating a higher demand for workers) and survey results indicate a difficulty in hiring new staff have not yet led to wage growth. The RBA maintains its belief that they eventually will.